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What are business expenses when expenses are paid by 100% stockholder

Resolved Question:

What are business expenses when expenses are paid by 100% stockholder of a Sub S Corporation?
Submitted: 5 years ago.
Category: Tax
Expert:  CGCPA replied 5 years ago.

Welcome to Just Answer. I am here to help you resolve your tax and finance concerns. Please feel free to ask anytime you need extra help.

Business expenses are those which are needed for the operations of the business. In the case of an S Corporation they are recorded by crediting the shareholders' loan account and debiting the various expense categories. Although this is not a desirable way to operate a business it is not illegal. When business operations permit the shareholder can take money from the business as a loan repayment (whole or partial) without tax consequences to the shareholder. Here is a piece from the IRS concerning business expenses. It also contains links (highlighted) you may find useful.

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Deducting Business Expenses

Business expenses are the cost of carrying on a trade or business. These
expenses are usually deductible if the business is operated to make a

What Can I Deduct?

To be deductible, a business expense must be both ordinary and necessary. An
ordinary expense is one that is common and accepted in your trade or business. A
necessary expense is one that is helpful and appropriate for your trade or
business. An expense does not have to be indispensable to be considered

It is important to separate business expenses from the following

  • The expenses used to figure the cost of goods sold,

  • Capital Expenses, and

  • Personal Expenses.

Cost of Goods Sold

If your business manufactures products or purchases them for resale, you
generally must value inventory at the beginning and end of each tax year to
determine your cost of goods sold. Some of your expenses may be included in
figuring the cost of goods sold. Cost of goods sold is deducted from your gross
receipts to figure your gross profit for the year. If you include an expense in
the cost of goods sold, you cannot deduct it again as a business expense.

The following are types of expenses that go into figuring the cost of goods

  • The cost of products or raw materials, including freight

  • Storage

  • Direct labor costs (including contributions to pensions or annuity plans)
    for workers who produce the products

  • Factory overhead

Under the uniform capitalization rules, you must capitalize the direct costs
and part of the indirect costs for certain production or resale activities.
Indirect costs include rent, interest, taxes, storage, purchasing, processing,
repackaging, handling, and administrative costs.

This rule does not apply to personal property you acquire for resale if your
average annual gross receipts (or those of your predecessor) for the preceding 3
tax years are not more than $10 million.

For additional information, refer to the chapter on Cost of Goods Sold,
Publication 334, Tax Guide for Small Businesses and the chapter on Inventories,
Publication 538,
Accounting Periods and Methods.

Capital Expenses

You must capitalize, rather than deduct, some costs. These costs are a part
of your investment in your business and are called capital expenses. Capital
expenses are considered assets in your business. There are, in general, three
types of costs you capitalize.

  • Business start-up cost (See the note below)

  • Business assets

  • Improvements

Note: You can elect to deduct or amortize certain business
start-up costs. Refer to chapters 7 and 8 of Publication 535, Business

Personal versus Business Expenses

Generally, you cannot deduct personal, living, or family expenses. However,
if you have an expense for something that is used partly for business and partly
for personal purposes, divide the total cost between the business and personal
parts. You can deduct the business part.

For example, if you borrow money and use 70% of it for business and the other
30% for a family vacation, you can deduct 70% of the interest as a business
expense. The remaining 30% is personal interest and is not deductible. Refer to
chapter 4 of Publication 535, Business
, for information on deducting interest and the allocation

Business Use of Your Home

If you use part of your home for business, you may be able to deduct expenses
for the business use of your home. These expenses may include mortgage interest,
insurance, utilities, repairs, and depreciation. Refer to Home Office Deduction
and Publication 587,
Business Use of Your Home
, for more information.

Business Use of Your Car

If you use your car in your business, you can deduct car expenses. If you use
your car for both business and personal purposes, you must divide your expenses
based on actual mileage. Refer to Publication 463, Travel,
Entertainment, Gift, and Car Expenses
. For a list of current and prior year
mileage rates see the Standard
Mileage Rates

Other Types of Business Expenses

  • Employees' Pay - You can generally deduct the pay you give
    your employees for the services they perform for your business.

  • Retirement Plans - Retirement plans are savings plans that
    offer you tax advantages to set aside money for your own, and your employees'

  • Rent Expense - Rent is any amount you pay for the use of
    property you do not own. In general, you can deduct rent as an expense only if
    the rent is for property you use in your trade or business. If you have or will
    receive equity in or title to the property, the rent is not deductible.

  • Interest - Business interest expense is an amount charged
    for the use of money you borrowed for business activities.

  • Taxes - You can deduct various federal, state, local, and
    foreign taxes directly attributable to your trade or business as business

  • Insurance - Generally, you can deduct the ordinary and
    necessary cost of insurance as a business expense, if it is for your trade,
    business, or profession.

This list is not all inclusive of the types of business expenses that you can
deduct. For additional information, refer to Publication 535, Business

References/Related Topics

You may want to review IRS publication 535 which expressly deals with business expenses. It is too large to reproduce here so I am providing a link to the publication.

CGCPA and other Tax Specialists are ready to help you